THE SENATE                           S.R. NO.              49
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            

                    SENATE  RESOLUTION

 1        WHEREAS, electronic commerce on the Internet, also known
 2   as "e-commerce", has expanded exponentially in recent years;
 3   and
 5        WHEREAS, the Internet has the potential to offer
 6   tremendous returns on investment, especially for small
 7   businesses, entrepreneurs with new products, retailers wanting
 8   to expand beyond their local market, and American businesses
 9   seeking an efficient way of penetrating foreign markets; and
11        WHEREAS, it is estimated that forty per cent of all United
12   States companies were expected to be selling products online by
13   the end of the last century; and
15        WHEREAS, the first annual report of United States
16   Government Working Group on Electronic Commerce found that
17   fewer than ten million people worldwide were using the Internet
18   in 1995, more than one hundred forty million people worldwide
19   used the Internet in 1998, and that more than one billion
20   people worldwide will be using the Internet in the first decade
21   of the new century; and
23        WHEREAS, information technology industries have accounted
24   for more than one-third of real growth in the United States
25   gross domestic product over the past three years; and
27        WHEREAS, information technology industries employ more
28   than seven million workers in the United States, and by 2006
29   more than one-half of the United States workforce is expected
30   to be employed in industries that are either major producers or
31   intensive users of information technology products and
32   services; and
34        WHEREAS, Forrester Research, an independent research firm,
35   estimates that Internet-related revenues will grow from
36   $43,000,000,000 in 1998 to more that $109,000,000,000 by the
37   end of 1999 and could reach $3,200,000,000,000 by 2003; and

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                                  S.R. NO.              49

 1        WHEREAS, the growth of e-commerce has raised concerns
 2   about the taxation of goods purchased over the Internet and
 3   shipped to Hawaii; and
 5        WHEREAS, for years, the United States Supreme Court has
 6   prevented states from requiring out-of-state sellers to collect
 7   sales and use taxes legally due from buyers; and
 9        WHEREAS, now that many experts are predicting that the
10   Internet will revolutionize retailing, however, many states are
11   beginning to question the viability of their sales taxes in the
12   electronic commerce environment, with some experts even
13   questioning whether the sales tax will be viable in a twenty-
14   first century economy; and
16        WHEREAS, the issue of taxing e-commerce transactions is
17   complicated by the fact that Hawaii has no sales tax but a
18   general excise tax, although there have been calls to eliminate
19   the excise tax entirely and replace it with a sales tax; and
21        WHEREAS, further complicating these issues is the fact
22   that e-commerce is not bound geographically and its borders are
23   not easily discernible; and
25        WHEREAS, transmissions over the Internet are made through
26   packet-switching, making it impossible to determine with any
27   degree of certainty the precise geographic route or endpoints
28   of a specific Internet transmission and unfeasible to separate
29   domestic from foreign Internet transmissions; and
31        WHEREAS, inconsistent and inadministrable taxes imposed on
32   Internet activity by subnational and national governments may
33   threaten not only to subject consumers, businesses, and other
34   users engaged in interstate and foreign commerce to multiple,
35   confusing, and burdensome taxation, but also to restrict the
36   growth and continued technological maturation of the Internet;
37   and
39        WHEREAS, the complexity of the issue of domestic taxation
40   of e-commerce is compounded when considered at the global level
41   with almost two hundred separate national governments; and
43        WHEREAS, in June 1999, the accounting firm Ernst & Young
44   released a comprehensive report concluding that sales tax lost
45   on Internet transactions amounted to barely one-eighth of one

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                                  S.R. NO.              49

 1   per cent of total state and local government sales and use tax
 2   collections in 1998; and
 4        WHEREAS, the United States Congress passed the Internet
 5   Freedom Act of 1998, establishing a three-year moratorium
 6   against special, multiple, and discriminatory taxation of the
 7   Internet and e-commerce; and
 9        WHEREAS, as part of the Internet Tax Freedom Act, Congress
10   established the Advisory Commission on Electronic Commerce to
11   study federal, state, local, and international taxation and
12   tariffs on transactions using the Internet and Internet access.
13   The Commission's 19 members include three governors, heads of
14   several major information technology corporations and other
15   government and business leaders from across the nation; and
17        WHEREAS, this Commission is tasked with producing what is
18   arguably the most important policy initiative of the
19   information age, and its recommendations on the critical issues
20   of electronic commerce and tax policy will have global
21   implications.  The Commission's recommendations on the critical
22   issues of e-commerce and tax policy are to be submitted to
23   Congress no later than April 2000; and
25        WHEREAS, in 1999, Hawaii demonstrated its commitment to
26   the development of the Internet and e-commerce by passing its
27   own Internet Tax Freedom Act, codified as section 231-8.6,
28   Hawaii Revised Statutes, which bans discriminatory taxes on e-
29   commerce and Internet access for a five-year period; and
31        WHEREAS, while the State recognizes that the Internet is a
32   powerful tool that is capable of revolutionizing the conduct of
33   commerce, it is nevertheless concerned about the effect of
34   electronic commerce on the State's tax base; and
36        WHEREAS, further eroding Hawaii's tax base are income and
37   excise tax cuts passed in 1998 and 1999, under which Hawaii
38   residents could see their personal income taxes cut by as much
39   as twenty-three per cent over four years, while sizable
40   reductions in the excise tax are being phased in over seven
41   years; and
43        WHEREAS, there is a need to determine how rapidly the
44   State's tax base is shrinking, how much of that shrinking tax

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                                  S.R. NO.              49

 1   base is due to electronic commerce, and how to address these
 2   issues; now, therefore,
 4        BE IT RESOLVED by the Senate of the Twentieth Legislature
 5   of the State of Hawaii, Regular Session of 2000, that the
 6   Governor is requested to convene a task force to study the
 7   effects of electronic commerce on Hawaii's tax base; and
 9        BE IT FURTHER RESOLVED that the task force is requested to
10   be established within the Office of the Governor and to include
11   representatives of the public and private sectors, including
12   persons who are knowledgeable about the Internet and e-
13   commerce, as well as representatives of the Department of
14   Taxation and the Tax Foundation of Hawaii; and
16        BE IT FURTHER RESOLVED that in carrying out its duties,
17   the task force may request staff assistance from the Department
18   of Taxation and other appropriate state executive agencies; and
20        BE IT FURTHER RESOLVED that the task force is requested to
21   study the following issues:
23        (1)  How rapidly the State's tax base is shrinking, if at
24             all;
26        (2)  How much of that shrinking tax base is due to the
27             effects of electronic commerce;
29        (3)  Whether the general excise tax should be replaced by
30             a state sales tax;
32        (4)  The feasibility of imposing any form of tax on e-
33             commerce and Internet access;
35        (5)  What other measures might be taken to address the
36             State's shrinking tax base; and
38        (6)  Any other issues related to the taxation of e-
39             commerce and Internet access;
41   and
43        BE IT FURTHER RESOLVED that the task force is requested to
44   report its findings and recommendations, including any proposed

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                                  S.R. NO.              49

 1   implementing legislation, to the Legislature no later than
 2   twenty days before the convening of the Regular Session of
 3   2001; and
 5        BE IT FURTHER RESOLVED that certified copies of this
 6   Resolution be transmitted to the Governor and the Director of
 7   Taxation.
12                         OFFERED BY:  ____________________________